Aug. 3, 2012, 5:23 a.m. EDT
The most important charts in the world
By Michael A. Gayed
"Good things happen when you get your priorities straight." — Scott Caan
Markets sold off yesterday in what was quite a volatile day of trading, but as I noted in my Twitter feed throughout the session, the decline was deceptive. Draghi "disappointed" markets by not enacting any new policy measures but pretty much left the door open for monetization.
I have, on numerous occasions, brought up the idea that I believe the likely course of action now is an implied cap on Italian and Spanish bond yields, such that the pressure is maintained on the governments of those countries to continue to cut debt. But that the pressure doesn't get to the point where it sends the entire system into a tailspin.
I spoke about this at length right as the news was crossing in the morning in an interview which can be seen
here .
Central bank paranoia remains alive and well, and as I've said before, either reflation happens organically, or “SuperBen and the League of Extraordinary Bankers” will make it happen.
What has prevented reflation from occurring organically in the face of bond yields below inflation rates has ultimately been fear of Lehman 2.0 through Spain. For reflation to occur, money has to be willing to take risk.
However, it is the memory of 2008 that’s held risk-taking back, even in the face of a strong year for stocks on a real return basis. As such, while the ECB didn't enact new policy measures, it is clear that they, as well as nearly every central bank in the world, will work to prevent an event.
Prevent the event and rally on as reflation expectations take hold.
I believe this is precisely the way markets are reading this. I say this because of the most important charts in the world — those of the bear trade. I have talked about health care (NAR:XLV) , consumer staples (NAR:XLV) , and utilities (NAR:XLU) as being part of the "bear trade" given that these areas of the market tend to outperform when expectations are growing over a recession, higher volatility, and deflation. However, as
I noted on CNBC , those areas are beginning to crack DESPITE no policy action INTO the decline.
Take a look below at the price ratios of the health care (top), consumer staples (middle), and utilities (bottom) ETFs all relative to the Dow Jones Industrial Average (NAR:DIA) . As a reminder, a rising price ratio means the numerator/bear trade sector is outperforming (up more/down less) the denominators/DIA. For a larger chart, visit
here . .
First, notice that these three sectors tend to all outperform (trend higher) and underperform (trend lower) in unison, and that those advances coincide with difficult environment for stocks, while those declines coincide with bullish runs in market averages.
In each case now, the ratios are 1) hitting extremes last hit right before the “Fall Melt-Up” of 2011 without an actual event, and 2) are now ALL showing signs of rolling over as those ratios fall below their respective 20-trading-day moving averages.
Should these trends be just getting started as I suspect they are, it means risk-taking is under way internally within markets. This in turn means the environment favors stocks and the “Summer Surprise” thesis/”Fall Melt-Up” of 2011 redux I have brought up in my writings here before.
I am highlighting here what price is specifically saying, and continued weakness in the most important charts in the world means another pulse higher in stocks is highly likely. Intermarket price action must be prioritized above all else.
This writing is for informational purposes only and doesn't constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
